A Debt Management Plan is an informal arrangement with your creditors. You pay them as much as you can afford each month, which is less than the standard monthly payment, and ask them to freeze interest. Check out the DMP Flowchart to see if it is a good option for you. A key figure for you to focus on is the length of time it will take to clear all your debts if all your creditors freeze interest.
DMPs can be short term. They are a great option if you expect your situation to improve. Some examples: it may take a few months to get a new job after redundancy; your children have left home so when your tenancy ends you will be moving to somewhere smaller; the HP on your car will finish in a few months; you have put the house on the market and can clear your debts when it sells.
In these situations, it doesn’t matter if you can only pay £5 to each of your debts (this is called a ‘token payments’ DMP) – or even nothing. A short-term DMP is the umbrella in the picture – it stops the man getting rained on (interest on your debt is frozen) but it doesn’t solve his debt problem.
A DMP can also be the long-term way of clearing all your debts. This can work well, but you need to be aware of the things that may go wrong with long term DMPs:
- Your creditors do not have to agree to the DMP and freeze interest. They may phone you and write to you a lot, especially at the start.
- If they do agree it may only be for 6 months after which you will have to supply another Financial Statement. They can later change their mind or sell the debt on so you have to persuade another creditor to agree.
- A creditor may decide to take court action, going for a County Court Judgment (CCJ). If you have equity in your house, it is possible that a creditor may seek a charge over your house.
- If your DMP will last a very long time then you may have to cope with a lot of things going wrong – the car becoming very expensive to maintain, house maintenance jobs accumulating, household goods have to be replaced, needing to move house etc
- After a few years your debts will have dropped and a creditor who has so far been happy to freeze interest may start charging interest again as your payment is now more than the usual monthly amount, so your DMP will have to go on for longer than you thought.
The more money that you owe, the longer the DMP will take. The more equity you have, the more likely you are to have problems with a long-term DMP and the more important it is for you to consider other ways of tackling your debt problems that are more certain.
But if you are hesitating about going bankrupt, or uncertain about whether you could live off a restricted budget for an IVA, then a DMP is a good stop-gap for a few months whilst you think things through. If no other debt options will work for you, then a DMP, however long, may be your only fall back.
Pros gives you a breathing space to get your finances sorted out, hopefully stops your debts increasing with interest and charges being added
Cons may take a very long while, not all creditors may agree to freeze interest, won’t stop creditors contacting you or even taking court action, most creditors will report an agreed DMP as a default on your credit file
Debt Camel says Short term DMPs are good options, it’s the long-term ones that sometimes come unstuck.
Arrange your own DMP
In a “DIY DMP” you write a letter to each of your creditors saying that you cannot make the usual monthly payments because your circumstances have changed, offer them £x per month and ask them to freeze interest and charges.
Although you can have a managed DMP (see below), organising your DMP yourself has advantages if you feel confident dealing with the paperwork as it leaves you in control of your finances and you can make changes if your income / expenses alter (although you shouldn’t be doing this every month!) Also most DMP management companies require a minimum level of payments to be made and you may not be able to afford these.
National Debtline has sample letters to creditors that you can use. There is one for ‘pro rata’ offers and one for ‘token or no payment’ offers. Broadly if you have more than £5 per creditor to pay each month you should use the ‘pro rata’ letter.
An alternative is to use the on-line CABmoney DMP service. Here you put in details of your debts and expenses / income, the system will then generate pro-rata letters to creditors and also follow-up letters – see this article for more details of how this works and how it helps you.
You will get some calls and letters when your creditors receive your DMP offer. To help you feel in control, be well organised: keep your letters to and from creditors in a file and have a sheet where you make a note of phone calls. Be firm – just repeat that you have shown them your budget and you cannot afford any more than the £x a month you have offered. If they threaten to take you to court, they are probably bluffing, but it is possible. In this case you use your budget to complete the Income and Expenditure details on the court form and make an offer of £x a month – exactly what you have already offered – normally the judge will accept this. Your creditors know this – that is why court action is not common.
A free managed DMP
If you can only afford to make token offers (see above) then normally StepChange and Payplan will not take you on as a client and you will have to write to your creditors yourself – see the DIY DMP approach above. Alternatively, there is a new charity, the Debt Counsellors, who can run a ‘token payment’ DMP for you, see this article.
You should contact StepChange or Payplan by phone or email and get a phone appointment at which your situation will be discussed. Have your Financial Summary and a list of your creditors in front of you during this phone call as this is the first thing they will want to explore with you. Sometimes they will suggest that you should consider another approach to dealing with your debts – you should take this suggestion seriously and ask them to explain what the advantages of this would be.
If a firm agrees to set up a DMP for you, they will want you to confirm it in writing and they will explain the procedures. For the first month or two you may well still get calls and letters from your creditors, but as the DMP settles down, most creditors will stop bothering you.
Don’t pay for a DMP!
Other companies charge you for operating a DMP – these advertise widely but you should not use one of these. Their service is no better than free DMP providers and the DMP will last longer as less money is going to your creditors. There is a calculator at Debt Wizard that shows just how much these fees can prolong your DMP.
You may need to change banks
If you owe money to a bank that you have your usual bank account with, you will need to open a new one with a different bank and move your wages, direct debits and standing orders over there – otherwise when the creditor gets the letter about the DMP, they may decide to help themselves to the money in your current account leaving you with not enough to live on :( Don’t think this can’t happen to you – it is a nightmare for those people it does happen to.